Bullish: SP500 Levels, Refreshed

Takeaway:After yesterday’s monster move, for this market to be flat on the day is saying something.

POSITIONS: 11 LONGS, 7 SHORTS

After yesterday’s monster move, for this market to be flat on the day is saying something.

It either means tomorrow’s jobs print is going to surprise on the upside, or people are about to get run over again on the long side – either way, we’ll have a big move!

I respect the signals above the noise – and both our research and risk management signals are telling me that there’s an increasing probability that headline employment trends continue to improve.

Yes, that would be bad for bonds; bad for gold, relative to stocks (2 of my 7 SHORTS are GLD and GDX).

Across our core risk management durations, here are the lines that matter to me most:

Immediate-term TRADE resistance = 1474

Immediate-term TRADE support = 1449

Intermediate-term TREND support = 1419

In other words, the SP500 is in a Bullish Formation (bullish TRADE, TREND, and TAIL), and the research signal on #GrowthStabilizing confirms that risk management signal.

KM

Keith R. McCullough Chief Executive Officer

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01/03/13 11:09 AM EST

SSS Focus on Margins, Not Sales

Takeaway:A strong final week wasn’t enough to save the month as retailers had already turned to aggressive markdowns.

A strong final week wasn’t enough to save the month as the dwindling number of retailers that are still reporting sales results had already turned to aggressive markdowns elevating Q4 margin related earnings risk.

December Retail Sales coming in better than expected with 12 companies beating expectations compared to 6 misses was little consolation in light of recently lowered numbers. With tough January comps ahead, one of the key factors to year-end performance and start to 2013 will be inventory induced margin risk. On the whole, the industry was fairly lean headed into the holidays, but in the absence of early holiday demand that mattered little into month’s end as retailers accelerated markdown activity.

In the chart below, note how there was only one week in the final five weeks of the year where sales growth bested prior year levels. This chart is important because it is the ICSC index, which is a weighted index of 80 (non-food and non-auto) retailers across sub-categories that dwarfs the 18 that currently report same store sales numbers publicly. Note that starting in February, that sample will be down to 15. Our sense is that it will be closer to zero in a year, and we’ll close the chapter of information flow that has always been same store sales day.

ICSC Same Store Sales Index

Back to the call-outs...

For the second consecutive quarter, KSS takes home the prize for negative callout of the day. This hardly comes as a surprise with KSS the most over-inventoried department store retailer headed into the holidays (see charts below). As a result, KSS confirmed they turned to deeper than planned discounts in order to clear the decks headed into fiscal 2013 taking down 4Q estimates by more than 20% in the process. Retailers with more favorable sales/inventory levels (i.e. at less risk) include TJX, ROST, and TGT.

The biggest positive callouts were COST and JWN both of which came in nearly 2x expectations of ~4.5% comps. While more impressive for COST given its sheer size, the strength of JWN at the high-end is perhaps most notable given recent concerns regarding luxury retail. This is a positive read-through for handbag related names (FNP, KORS, COH) with the category highlighted as running above comp average.

Other Callouts:

Off-price strength with ROST and TJX only retailers to raise numbers into year-end. It’s little coincidence that both companies sport superior sales/inventory levels relative to peers.

GPS (+5% vs +3.9%E) Old Navy coming in VERY strong in December rebounding from three consecutive months of slowing growth – offset in part by deceleration in all other segments.

Lap JCP induced comp reacceleration starting February.

Back to the well approving $1Bn share Repo plan (replacing prior $1Bn plan)

M (+4.1% vs +4.1%E) in-line with online up +52%

Announced closing 6 stores to account for $2-$4mm in related costs (plan to open 9 in 2013)

Please CLICK HERE to access the materials for this call and dial in 5-10 minutes prior to the 1:00pm EST start time using the number provided below. If you have any further questions email .

Toll Free Number:

Direct Dial Number:

Conference Code: 939528#

The Hedgeye Healthcare Team, led by Tom Tobin, will be hosting an expert conference call today, at 1:00pm EST featuring industry expert Ken Burdick, former Senior Executive of United HealthGroup and Chief Executive Officer and President of Blue Cross Blue Shield of Minnesota.

The call will analyze the impact of the Affordable Care Act across the healthcare industry, addressing the opportunities and risks associated with the implementation of the Patient Protection and Affordable Care Act. Ken Burdick has more than 25 years of experience in managed healthcare and his insight to the implementation of this act will be extremely insightful and constructive in managing risk across the managed care names.

KEY TOPICS WILL INCLUDE:

Will employers drop coverage? Penalties? Taxes?

Insurers versus exchanges

Consolidation among providers and payers

ABOUT KEN BURDICK:

Served as SVP of Medicaid Business at Coventry Health Care Inc. and managed its Medicaid and Behavioral Health (MHNet) businesses

Served as President and CEO of Blue Cross and Blue Shield of Minnesota

October 1995 to May 2009 employed by UnitedHealth Group

May 2008 to May 2009, served as the CEO of Secure Horizons, a Medicare business

November 2006 to May 2008, served as the CEO of United Healthcare's Commercial Business

April 2004 to November 2006, served as CEO of United Healthcare's Southwest Region and President of United Healthcare Public Sector

January 2000 to April 2004, served as the CEO of United Healthcare of Arizona

Prior to 2000, served as the head of the national underwriting organization for all lines of business and the general manager of the central Texas operation

Served as the CEO and President of United HealthCare Services, Inc.

Director of United Biologics, LLC since October 2012

Serves as a Director of A.T. Still University of Health Sciences

Serves on the Board of Directors for Preferred Homecare and PASR, a non-profit Board advancing school readiness throughout Minnesota

Earned his bachelor's degree from Amherst College and a law degree from University of Connecticut School of Law

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YUM: Plenty To Like

Yum! Brands (YUM), owner of KFC, Taco Bell and Pizza Hut, is one of our best long ideas in Restaurants. We think Yum! is attractive on the long side for 2013 for several reasons: the company is better diversified than Starbucks (SBUX) and McDonald’s (MCD), the recent sell off in the stock makes for a compelling entry point for investors and the company’s improving US business complements strong international unit growth in 2013. Recent news related to a KFC China chicken supplier and its excessive use of antibiotics in its feed has pushed YUM shares lower but we see the most important fundamentals related to the stock as positive from here.

The chart posted above highlights our macro team's quantitative view of the stocks. Currently, YUM is in a bearish formation with near-term TRADE and intermediate-term TREND resistance at $67.45 and $68.81, respectively.

JOBS DATA: Tailwinds Ahoy

This morning’s jobless claims numbers rose 12k to 372k from 360k, which was better than expected. It reflects two weeks of data and after the last report, in which 19 states worth of data was omitted, this is a real positive for the economy. With Hurricane Sandy no longer affecting the data, we’re seeing a continuing trend of improvement in the labor market that we believe will continue through February despite the seasonality distortion (i.e. holiday hiring), which does play into the numbers.

December Snow - Modest Help for Drought Conditions

December was a useful month in terms of snowfall across the Midwest – 68.4% covered by snow with an average depth of 3.2 inches (National Weather Service). There was no snow cover in November (not a particularly constructive month in terms of remedying drought conditions) and very little in December 2011 as well (2.3% covered by snow), so snow season is better begun than it was last year.

While constructive, the December snowfall only represents the equivalent of about ½ inch of rain – snowfall in January and February will have to be measured in feet in order to provide substantial relief to the drought conditions that still linger across much of the United States.

We remain bearish on corn fundamentally, and the commodity remains bearish trade and trend on our model. However, the persistent drought conditions bear watching as we progress through the winter.

Robert Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

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